ERS/VRS Amount Received and Not Mandated by Contract – Tribunal Treats as Capital Receipt, Rejects Taxability Under Section 17(3)

• The assessee received ₹29.82 lakhs from employer under a Voluntary Retirement Scheme (VRS)/Early Retirement Scheme (ERS).

• The assessee disclosed the amount as salary income under Section 17(3) of the Income-tax Act and claimed relief under Section 89.

• The Assessing Officer (AO) held that the amount was compensation on termination of employment taxable under Section 17(3)(i) and allowed only partial relief under Section 89(1).

• The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating the compensation was salary income and not capital in nature.

• Aggrieved by this, assessee filed an appeal and matter reached to Tribunal.

• Before the Tribunal, the assessee argued that the amount received was voluntary, non-contractual severance compensation, which should be treated as a capital receipt, and hence not taxable as salary.

• The Tribunal set aside the CIT(A)’s order, directed the AO to delete the addition, and the appeal was fully allowed in favour of the assessee for AY 2016–17.

Tenancy Right Treated as Capital Asset – Section 54F Exemption Allowed on Flat Received Upon Surrender​

• The assessee and his daughter were tenants in a building undergoing redevelopment, and both entered into a registered Permanent Alternate Accommodation (PAA) agreement with the builder.

• Under the PAA, the assessee’s daughter surrendered her tenancy rights and was allotted Flat No. 1103 in the redeveloped property at no monetary consideration.

• The flat was registered in the assessee’s name, though the allotment letter from the builder was issued in the daughter’s name.

• The assessee treated the transaction as a transfer of a capital asset—tenancy rights—and claimed it should be taxed under the head “Capital Gains” with exemption under section 54F.

• During assessment proceedings for AY 2018–19, the Assessing Officer observed that the flat was received for nil consideration while its stamp duty value (SDV) was ₹2.88 crores.

• The AO invoked section 56(2)(x)(b)(B) and taxed ₹2.88 crores as “Income from Other Sources” in the hands of the assessee, since his name appeared first in the PAA agreement.

• The Commissioner (Appeals) upheld the AO’s view, stating that since there was no consideration paid, the SDV of the flat should be deemed as taxable income under section 56.

• Aggrieved by this, assessee filed an appeal and matter reached to Tribunal.

• On appeal, the Tribunal held that tenancy rights are capital assets, and their surrender constitutes a “transfer” taxable under section 45, not section 56.

• Since the SDV of the new flat was fully reinvested into a residential property via the PAA, the assessee was entitled to full exemption under section 54F—even if not claimed in the original return.

• The Tribunal ruled that the AO’s addition under section 56(2)(x) was invalid and directed its deletion, concluding that the appeal be allowed fully in favour of the assessee.

Appropriate Benchmark Rate for Interest on Delayed Receivables from AEs in Foreign Currency – LIBOR vs SBI PLR

• The assessee rendered software development and support services to its Associated Enterprises (AEs) during AY 2020–21, involving international transactions totaling approximately ₹136 crore.

• All invoices were raised in foreign currency, realizations were received in foreign currency, and receivables were recorded in foreign currency, later restated in INR per Accounting Standard 11 (AS-11).

• The Assessing Officer (AO), during assessment for AY 2020–21, noted the presence of international transactions with AEs and referred the matter to the Transfer Pricing Officer (TPO) under section 92CA for determining the arm’s length price.

• The TPO observed that payments from AEs were received beyond the stipulated 30-day credit period and treated such delays as a form of capital financing to AEs.

• Accordingly, the TPO proposed to impute interest on delayed receivables using SBI Prime Lending Rate (PLR) plus 300 basis points (16.55%) and suggested a transfer pricing adjustment of ₹1.98 crore.

• The assessee objected to the use of the domestic interest benchmark (SBI PLR) and argued for the application of LIBOR-based rates given the foreign currency nature of the transactions.

• The assessee filed objections before the Dispute Resolution Panel (DRP) under section 144C.

• The DRP directed the TPO to allow a 60-day credit period and to verify whether the receivables were export proceeds in foreign currency.

• The DRP held that if payments were indeed received in foreign currency, then LIBOR plus 400 basis points should be applied instead of the SBI PLR.

• In the order passed giving effect to DRP’s direction, the TPO claimed the assessee failed to substantiate receipt of foreign currency and thus continued applying SBI PLR plus 300 basis points, reducing the adjustment to ₹60.57 lakh.

• The TPO also failed to apply the working capital adjustment as directed by the DRP.

• The assessee appealed to the Income Tax Appellate Tribunal (ITAT).

• The Tribunal reviewed the audited financials and confirmed that invoices were raised, payments received, and receivables reflected in foreign currency, and restated in INR as per AS-11.

• The Tribunal held that since the receivables were genuinely in foreign currency and related to transactions with AEs, interest should be benchmarked using LIBOR plus 400 basis points.

• The Tribunal also found that the TPO failed to follow the binding directions of the DRP under section 144C(10), making the TPO’s order unsustainable.

• The Tribunal quashed the adjustment and allowed the appeal in favour of the assessee, confirming that LIBOR-based benchmarking was applicable in such cases.